2019 (8) TMI 1603 - AT - Income Tax

Rejection of books of accounts - AO estimated the income @12.5% on main contract receipts and 8% on the sub contract receipts - With regard to the rental income, dividend on chits and interest on IT refund, the CIT(A) held that the same cannot be included in the business income and they are required to be separately taxed and there is no dispute on this issue - AR argued that the assessee is engaged in only one business i.e. civil contracts and maintaining books of accounts relating to civil constructions. Once, the AO rejects the books of account, there is no requirement for relying on the same books of accounts and make separate additions on account of various items - HELD THAT - AO did not make any discussion in the assessment order as to why these items are required to be taxed separately - AO simply made addition without giving any reasoning. Therefore, we have no option except to rely on the submissions made by the Ld.AR to arrive at the nature of receipts. During the appeal hearing also no reason was given by the Ld.DR with regard to nature of the receipts. From the explanation offered by the assessee, we understand that the term deposits were made by the assessee for the purpose of obtaining the bank guarantee as margin money on which the assessee had received the interest. Since the deposits were made from the funds of the business and for the purpose of bank guarantee, the interest on term deposits are required to be treated as business income, but not to be taxed separately under other sources. The scope of profits and gains of the business are wider than the income derived from the industrial activity. With regard to deduction u/s 80(IA), the deduction is allowable only from the profits derived from the industrial activity. The interest earned on bank deposits would cover under the scope of business income, but not for industrial activity, therefore, the Hon ble Delhi High Court held that the interest on bank deposits cannot be treated as profit and gain derived from the manufacturing activity by an industrial unit. Thus, the facts of the case law relied upon by the Ld.DR in Krishak Bharati Cooperative Ltd. 2012 (4) TMI 454 - DELHI HIGH COURT are distinguishable, not applicable in the assessee s case. Accordingly we, hold that the interest on term deposits are required to be treated as business income, but not to be taxed separately under other sources. Interest received on partner s current accounts - Interest received on partners current account, insurance claims, scrap sales and sundry creditors credit balances constitute business income. The assessee is engaged in the civil constructions and all the transactions are from the same business. It was informed during the appeal hearing that in the earlier years also the assessments were completed by estimation of income thus the expenditure claimed in the earlier years also was taken care in estimation. The department has not produced any evidence to show that interest on term deposits, interest received on partners current account are earned out of the surplus funds available to the assessee which was placed for earning the interest income as a separate source. Therefore, in the facts and the circumstances of the case the items discussed above constitute business income and no separate addition is required to be made, once the books of accounts are rejected by the AO. As per the provisions of section 29, the income referred to in section 28 shall be computed in accordance with the provisions contained in section 30 to 43 of the Act. Depreciation is required to be allowed from the estimated income, unless the AO computes the income or estimates the income clear off depreciation. Therefore, once the income is estimated after rejecting the books of accounts, the expenditure allowable from section 30 to 43 is taken care of except the depreciation as held in the case of CIT Vs. Y Ramacandra Reddy 2014 (9) TMI 205 - ANDHRA PRADESH HIGH COURT - In the instant case, the AO has estimated the income @12.5% and in the assessment order and the AO did not specify for what reasons, the items are separately made addition. Hence, we hold that the Ld.CIT(A) has rightly directed the AO not to include the above items under the head other income . Revision u/s 263 - interest on term deposits, interest on partners current accounts, rental income, sundry creditors balances written back - HELD THAT - As decided by the Tribunal in the assessee s own case in this order, the interest on term deposits placed for margin money for obtaining the bank guarantee, interest on current accounts of partners, constitute business income and taken care of in estimation of income. Similarly in the case of sundry creditors credit balances constitute business transactions as discussed in the earlier paragraphs. Since the interest on partners capital account, interest on term deposits and sundry creditors balances written back constitutes business income, no separate addition required. Therefore, we hold that there is no error in the assessment order which is prejudicial to the interest of the revenue with regard to items of interest on term deposits, interest on partners current accounts and sundry creditors balances written back. Accordingly, we set aside the order of the CIT passed u/s 263 on the items of interest on term deposits, interest on partners current account and the sundry creditors balances written back and allow the appeal of the assessee. Estimation of income by the AO @9% - On the very same issue, the assessee went on appeal before the CIT(A) requesting for allowing depreciation from estimated income and the CIT(A) enhanced the estimation of income from @9% to 12.5% before depreciation and directed the AO to allow the depreciation. Therefore, since the appeal was pending before the CIT(A) on the very same issue and the Ld.CIT being parallel authority, CIT has no jurisdiction to invoke the provisions of section 263 on pending issues before the Ld.CIT(A) - See SMT. RENUKA PHILIP VERSUS THE INCOME TAX OFFICER 2018 (12) TMI 129 - MADRAS HIGH COURT . Interest on income tax refund which was granted to the assessee u/s 244A and rental income - HELD THAT - Both the issues required to be taxed separately. The rental income required to be taxed under property, whereas the interest on income tax refund required to be assessed as income from other sources as discussed in detail in the assessee s case in this order. AR also did not make any argument on both the issues. Therefore, we uphold the order of the CIT with regard to rental income and the interest on income tax refund. Accordingly, the appeal of the assessee is partly allowed. Rectification of mistake u/s 154 - allowability of interest charged on accumulated business losses debited to the partners current accounts and allowability of deduction on the bank borrowings - HELD THAT - The issue is debatable whether the interest charged on accumulated losses required to be considered as business income or the income from other sources. Similarly the AR submitted that the amounts were advanced from the borrowed funds hence, whether the interest paid required to be allowed as deduction or not? Since the business income was estimated the AR argued that the interest earned on partners capital accounts also constitute business income, thus no separate addition is warranted. Therefore, the issue is not a simple issue of mistake which is permissible for rectification u/s 154. The issue is complicated and mixed question of law and fact which required to be adjudicated after examining the facts and law in detail. Such legal issues are not permitted to be rectified u/s 154. Therefore there is no case for making rectification u/s 154.

Summary

Issues Involved:
1. Classification of other income as business income or income from other sources.
2. Estimation of income and allowance of depreciation.
3. Validity of rectification under Section 154 of the Income Tax Act.
4. Revision of assessment orders under Section 263 of the Income Tax Act.
5. Allowance of interest on partners' current accounts as business income.

Issue-wise Detailed Analysis:

1. Classification of Other Income:
The primary issue was whether certain incomes should be classified as business income or income from other sources. The Assessing Officer (AO) had classified various incomes such as interest on term deposits, interest received on partners’ current accounts, rental income, dividend on chits, insurance claims, scrap sales, interest on IT refund, and sundry creditors' credit balances written off as income from other sources. The CIT(A) held that except for rental income, dividend on chits, and interest on IT refund, all other items should be treated as business income. The Tribunal upheld this classification, agreeing that items like interest on term deposits (used as margin money for bank guarantees), interest on partners' current accounts, insurance claims, scrap sales, and sundry creditors' credit balances written off are business income, as they are linked to the business operations of the assessee.

2. Estimation of Income and Allowance of Depreciation:
The AO had estimated the income at 12.5% on main contracts and 8% on sub-contract receipts, allowing depreciation separately. The CIT(A) and the Tribunal upheld the allowance of depreciation, following the principle that even when income is estimated, statutory deductions like depreciation should be allowed. This was supported by the jurisdictional High Court's decision in the case of Y. Ramachandra Reddy, which stated that depreciation is a statutory deduction that must be allowed even when income is estimated.

3. Validity of Rectification under Section 154:
The AO had issued a rectification order under Section 154 to disallow depreciation that was previously allowed. The CIT(A) and the Tribunal held that rectification under Section 154 is not permissible for points of law or debatable issues. The Tribunal noted that the issue of depreciation allowance requires detailed examination of records and facts, which cannot be addressed under Section 154. The Tribunal upheld the CIT(A)'s decision that the AO's rectification was not valid.

4. Revision of Assessment Orders under Section 263:
The CIT had revised the assessment orders under Section 263, finding that the AO had not properly examined the gross receipts and had allowed depreciation erroneously. The Tribunal noted that the CIT's revision was partly valid, particularly in addressing discrepancies in gross receipts. However, the Tribunal found that the CIT could not revise issues already pending before the CIT(A), such as the estimation rate of income and the allowance of depreciation. The Tribunal set aside the CIT's order on these grounds, emphasizing that the CIT cannot invoke Section 263 on issues already under appeal.

5. Allowance of Interest on Partners' Current Accounts:
The AO had treated interest on partners' current accounts as income from other sources, while the CIT(A) and the Tribunal treated it as business income. The Tribunal agreed with the CIT(A) that the interest on partners' current accounts, which represented business transactions and accumulated losses, should be classified as business income. The Tribunal noted that if the interest earned on partners' accounts is taxed separately, the corresponding interest paid on borrowings should also be allowed as a deduction. The Tribunal upheld the CIT(A)'s decision, rejecting the AO's separate addition of interest on partners' current accounts.

Conclusion:
The Tribunal dismissed the revenue's appeals and upheld the CIT(A)'s decisions, which classified certain incomes as business income, allowed depreciation on estimated income, and invalidated rectification under Section 154 for debatable issues. The Tribunal also set aside the CIT's revision under Section 263 on issues already under appeal. The assessee's cross objections were dismissed due to delays in filing without proper condonation petitions. The Tribunal's comprehensive analysis reinforced the principles of classification of income, allowance of statutory deductions, and procedural correctness in tax assessments.